UK House Prices Could Fall a Further 35% - Homes Still Not Affordable

I recently read an article on the Rock Star Investment Gloucestershire blog, in which they had taken data on average earnings for Gloucester, and compared it to the average sale price of Gloucester property, and found that the average Gloucester house price is 7.8 times the average salary of Gloucester residents. At that the author deduced that Gloucester property prices could easily fall by a further 40% or more.

The reasoning behind the article being the correlation between house price corrections and the house price to earnings ratio; with most impartial analysts believing that UK house prices will fall until the average house price is less than or equal to 3.7 times the average UK salary.

According to Halifax the current house price vs earnings ratio stands at 4.37, making houses more affordable than they have been for the past 6 years say Halifax.

Given that the average Gloucester house price was so much more expensive in relation to the average salary of its residents, I decided to expand the study and see if the same story was told for the UK.

According to the Halifax house price index the average UK house price is £158,565, Nationwide's index has it slightly lower at £154,016, splitting the difference gives us £156,290. According to the Office for National Statistics the average salary in the UK is £20,801. Going by that the average UK house price is 7.5 times the average salary.

But that is the average salary including part time workers. The average salary of people in full time employment in the UK is £25,123. Even going by that the average UK house price is still 6.22 times the average salary -- and still a long way off the 3.7 analysts believe will end the correction.

It's not that Nationwide and Halifax are lying, simply that they are using their mortgage customers to judge the average salary. Using house buyers in the house price to earnings ratio index makes the index inherently wrong.

The people who can afford to buy houses could be and are most likely to be the higher earners, so the average salary taken from them will obviously be higher than the true UK average salary. For the housing market correction to end homes need to be with 4 times the true average salary of all UK full time workers.

In fact the figures are irrefutable. The average salary is obviously the measurement taken in 2008, but if we look at the ONS graph for wage growth, it stopped dead in March 2008, which means salaries are about the same (if not lower) now as they were in 2008.

So there you have it, the average UK house price is 6.2 times the average UK salary, so how much farther must the fall? The answer: a little over 35%. A further fall of 35% off UK house prices would take 54,701.5 off the average UK house price, making it 101588.5, which is 4.04 times the average UK salary.

I don't actually think that prices will fall that far, I personally think that a recovery in the wider economy will shortly be followed by a recovery in the housing market, and I believe that will happen before prices fall a further 35%.

By Michael Sutton - 2009-06-11 14:34:53

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Filed under: UK Property, Opinion Articles

Tagged: UK House Prices | Affordability | UK Housing Market | Forecasts |

About the Author: Michael Sutton

Michael is a SEO content writer for Write About Property. He contributes regular UK property articles to the site.

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Comment By: Christopher Brown

Date: 2009-06-12 13:42:49

Comment:
I agreee with most of this article. However, to say that house prices will recover before it hits 4x earnings is laughable. Look to the past and you will find that house prices and equities always overshoot at the bottom and the top. We have a lot longer to go into this recession yet.

Comment By: John Smith

Date: 2009-06-15 18:21:31

Comment:
I'm a financial journalist and trying to figure out your reasoning. I guess as long as the PE ratio index (which specific index are you referring to?) is consistent over time then it should be useful. Are you saying that it used to include non-homeowners and now excludes them?

Comment By: Paul Forrester

Date: 2009-06-19 11:37:54

Comment:
Your line of argument seems fairly conventional and routine to the point where you state that 'the average UK house price is 7.5 times the average salary'. Then, it appears that such a multiple is too extreme, so you proceed to remove part-time workers and low-income earners salaries from the average salary, quite arbitrarily. This, conveniently reduces the P/E ratio from 7.5 to 6.2.
Neat! The only proble, of course, is that you have massaged the statistics a tad, rendering your article of very little vaalue.

Comment By: Liam Bailey

Date: 2009-06-20 19:08:37

Comment:
To Paul Forrester,

What you have described does not qualify as massaging the statistics, the statistics are the statistics, it is only the interpretation of them that is changed by removing part time workers.

Also I fail to see how that takes away the value from the article, given the fact that I have mentioned the p/e ration for part time workers and full time workers only, surely that increases the value?

Comment By: Hickling

Date: 2009-06-20 19:08:37

Comment:
Since when as someone on an "average" wage been able to afford to buy a property? Please indicate the year. In my opinion this has never been the case. basically first time buyers can only get on the property ladder either by buying jointly or with a significant help from family (or good financial planning). Therefore an interesting question would be as a first time buyer with a partner what is your average income? If it is two times the national average then we are already back to around 3.7 times joint income so away we go with another round of house price increases!

The real statistic is what is the average wage of home owners (excluding the 30% of people who cannot afford it) and the conmparison against average house prices? My view is we are a lot closer to *3.7% than *7.5. However, I think we are still in for a further 10% drop due to lack of mortgage availbility and job security.

Comment By: Paul Forrester

Date: 2009-06-23 16:55:00

Comment:
You state "..most impartial analysts believing that UK house prices will fall until the average house price is less than or equal to 3.7 times the average UK salary" As a result, you are able to advise "Going by that the average UK house price is 7.5 times the average salary". However, subsequently, you contradict yourself stating "the average UK house price is 6.2 times the average UK salary". So what is the definition of the average salary, according to most impartial analysts - the average salary of all UK workers or the average salary of UK full-time workers?